Saving for Retirement: How Much Do I Need?

by Tyler on Oct 23, 2011

Saving for retirement is essential, yet many working adults are not adequately educated on the amount of money they need in order to live comfortably in their golden years. The exact amount of money needed for retirement varies from person to person based on numerous factors. Calculating the amount of savings hinges upon spending habits, longevity, and healthcare.

Spending Habits

When calculating spending habits, it is important to remember all expenses, including basic needs like utility bills and food, but also clothing, travel, and entertainment. A wise decision is to sum up current monthly expenditures, then calculate inflation. It is possible to subtract some spending that will not be necessary in retirement, such as house payments, assuming the house will be paid in full, though having savings in place in case of home repairs is always a good idea.

Longevity

People are living longer with every advance in medical science. It is impossible to know exactly how long anyone will live, but a good estimate can be made based on lifestyle and family history. The average lifespan for American adults, according to the Centers for Disease Control and Prevention, is 77.9 years. With a retirement age of 67, one should plan for at least 10 years of funds.

Healthcare

As with longevity, it can be nearly impossible to determine exactly how much healthcare one might need in their later years, however this can be the largest expense for many adults. While programs like Medicare help with medical costs, they are not by any means comprehensive. One must be certain that enough money has been set aside for a supplemental insurance plan.

Once a retirement savings amount has been determined, the next step is saving the money and helping it to grow. The sooner this is determined and the sooner one can start saving, the more likely it will be that a comfortable savings amount can be achieved. However, it is never too late to begin saving for retirement or to add to and protect the savings that are already in place. There are a number of vehicles available to safeguard retirement savings.

Many employers offer 401k or 403b plans to help employees save for the future. Often these employers will even set up meetings with financial planners to help employees determine what is best for them. Currently, individuals may place up to $16,500 of pre-tax income into a 401k or 403b. Self-employed individuals may also set up their own 401k with many of the same benefits.

An IRA is another good choice for retirement savings. There are two types of IRAs: Roth and Traditional. Most individuals opt for Roth IRAs as they use pre-tax income for savings, though those with the highest incomes are only eligible for Traditional IRAs. Whichever type of IRA is chosen, the current maximum contribution is $5,000 for individuals under 50 years of age and $6,000 for those over 50.

Ideally, individuals should max out both an IRA and an employer sponsored plan. However, not everyone has the financial capabilities to do both. When deciding which path to pursue, consider first if employer matching is offered through the 401k. Some employers contribute a small amount to an employer sponsored plan, and if this is offered, this is the plan that should be contributed to first. If not, an IRA may be the better option to max out as the individual has more control over how and where the money is invested.

There is a downside to using retirement savings plans. Though Roth IRAs and 401ks utilize pre-tax income, they also are built with some pretty stiff fees for early withdrawals. These penalties are put into place to discourage investors from using their retirement savings early. These fees cause many to opt instead for personal savings plans that can be used as needed.

This article was included in the Carnival of Personal Finance #334 hosted by Barbara Friedberg Personal Finance.

{ 2 comments… read them below or add one }

Mary October 25, 2011 at 12:10 pm

Great post! We were planning on not having a mortgage and we’re on a great track. But we’re seeing that home maintenance issues are going to a significant cost and that we’re going to have to consider them also in our retirement calculations. We have a nice home but it’s not getting younger!!

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Tyler October 25, 2011 at 1:26 pm

I can appreciate your point on home maintenance costs. I found out just yesterday that our AC/heat pump will need replacing. Quoted us $4,800. For now, we’ve got a hard start kit in place to get the compressor going, but it’s on its last leg.

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